In a small economy in 2017, aggregate expenditure was $800 million while GDP that year was $850 million.Which of the following can explain the difference between aggregate expenditure and GDP that year?
A)Aggregate expenditure is always less than GDP in developed countries.
B)Firm investment in inventories was less than anticipated in 2017.
C)Firm investment in inventories was greater than anticipated in 2017.
D)Aggregate expenditure is always less than GDP in developing countries.
E)Consumer spending was greater than expected.

Question

Quizplus · Accepted Answer

The difference between aggregate expenditure and GDP can be explained by firm investment in inventories being greater than anticipated. When firms produce more goods than are sold (i.e., aggregate expenditure is less than the output), the unsold goods add to inventories, causing GDP (which includes the value of these inventories) to be higher than aggregate expenditure.

In a Small Economy in 2017, Aggregate Expenditure Was $800